The Short Leash on Coeur d'Alene Mines

Judging by the swift disposal of 20% of its market capitalization, the market was keeping this 84-year-old mine operator on a very short leash.

Coeur d'Alene Mines (NYSE: CDE) surprised investors with a $15.8 million net loss for the third quarter, impaired by $37.6 million in fair value adjustments relating to the company's gold royalty obligation to Franco-Nevada (NYSE: FNV) for 50% of gold production at its flagship Palmarejo mine. The gold price has more-than-doubled since Coeur inked that royalty in early 2009 for just $80 million, turning that cash consideration into some seriously costly capital.

And speaking of costs, Coeur revealed a 20% increase in operating cash costs to reach $9.05 per ounce of silver. "Unfavorable underground conditions" at Palmarejo forced Coeur to slow operations within a high-grade portion of the deposit in order to add "additional underground support measures." The company offset some of the underground shortfall with accelerated production from the open pit, but the increased proportion of lower-grade material -- as well as a "transition phase" in the open pit's mine sequence helped to push costs higher. Coeur's President and CEO Mitchell Krebs added: "It's important to stress what affected third-quarter production in the 76 clavo in Palmarejo's underground operation is a timing issue and is temporary in nature."

Because Coeur's second-largest silver mine, San Bartolomé, has itself struggled with upwardly mobile costs in recent quarters, the miner relies upon Palmarejo as the low-cost anchor in its portfolio. Palmarejo's average cost for the quarter of just $3.75 per ounce may not appear terribly troubling on its own, but it represents a 423% increase from the prior-year period that brought into focus the elevated cost structure at San Bartolomé. San Bartolomé suffered a 30% cost increase as well, recording a cash operating cost of $12.13 for the period.

And on the gold side, Coeur's Kensington mine in Alaska operated at a cost structure that I would characterize as sub-economic on an all-in basis. The industry's average all-in cost is roughly $1,200 per ounce, which AngloGold Ashanti (NYSE: AU) CEO Mark Cutifani characterized as essentially a break-even cost structure at prevailing gold prices once the industry's cost of capital is factored in. Wherever cash costs are trending above that average all-in cost, or at least until gold prices adjust to set a new floor above $2,000 per ounce, I encourage investors to watch those operations carefully for signs of improvement. Fortunately, Coeur expects Kensington's average cost to decline to roughly $950 per ounce for 2013, and I do expect a rising gold price to likewise ease the present margin malaise.

From a devastating stock collapse several years back that prompted a 1-for-10 reverse split, to the embarrassing mess involving disputed mining claims at the Rochester mine that could cede some 40.5 million silver-equivalent ounces of measured and indicated resources to claim-staker Rye Patch Gold, I believe the company has given some cause for the market to keep its stock on a short leash. That being said, Tuesday's 20% collapse may have pushed a bit further than the recent developments warranted. Although I plan to stick with my preferred silver investment vehicles -- which include Endeavour Silver (NYSE: EXK) and First Majestic Silver (NYSE: AG) -- I see more upside potential than downside risk in Coeur's stock after Tuesday's massive sell-off.

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With delay of an entire year until the trial, the Rye Patch issue is essentially dead and buried. In other words, CDE won!

BMO's upgrade yesterday to Outperform was the wink, wink, nod, nod signaler that Coeur's core supporters - including those surrounding Eric Sprott and his interests - are still very much behind the company.

It's just a matter of time before this company finally fulfills its promise as a major. Of course, with a continued very low share count, it is still extremely possible it will receive a hostile or even friendly takeout bid, especially if Gold and Silver reach new highs shortly, which many think they could.

Many of us believe CDE would be an attractive addition to Freeport, NEM, Frisco, Fresnillo - or possibly Glencore.

Revenue was $38.3 million for the three months ended September 30, 2012 as a result of selling 17,100 ounces of gold at an average realized price of $1,646 per ounce, and 1.05 million ounces of silver at an average realized price of $9.66 per ounce.

Revenue was $46.1 million for the same period in 2011 from selling 19,659 ounces of gold at an average realized price of $1,668 per ounce and 1.11 million ounces of silver at an average realized price of $12.00 per ounce. Sales in the third quarter of 2012 were 9% less than production due mainly to a broken crucible that delayed a shipment of dore to the refinery. The Company plans to sell these ounces during the fourth quarter.

Hard to believe the Shorter Distorters are still calling results a "loss."

The "loss" was on the punishing derivatives - which they'll be out from under fairly soon now - and would have registered as a gain if marked to market the day earnings came out instead of the end of the quarter as required.

Results without this extraordinary item were a profit of 29 cents, below consensus, but hardly miserable.

We all know, do we not, who holds the major part of the Short position in CDE? And if you hate this particular Nexus of funds - mostly out of London - like many of us do, not only is this a fabulous time to increase positions from a pure opportunistic point of view, you will also be helping the PM stocks, their indices, and Silver as a bonus.